Embed Size (px)
Citation preview
Munich Personal RePEc Archive
Scientific Revolution? A Farewell to
EconWPA. MPRA is welcome.
Harin, Alexander
3 October 2006
Online at https://mpra.ub.uni-muenchen.de/105/
MPRA Paper No. 105, posted 05 Oct 2006 UTC
Scientific Revolution? A Farewell to EconWPA. MPRA is welcome.
Alexander Harin
A new idea and approach are presented. The idea is to consider arrangements’ infringements as a generalization of a breach of a term of contract. The approach is based on this idea and on the economic uncertainty principle. Problems, which can be solved, research fields, which can be augmented or created, and fields of applications in practical economy are reviewed. The role of information media is described.
Contents
Introduction …………………………………………………………… 2
0.1. EconWPA – the King of public economic research media 0.2. The sudden announcement 0.3. MPRA – a new public economic research medium 0.4. This paper
1. Revolution or evolution? …………………………………………… 3
1.1. Ideal or non-ideal market? 1.2. Powerfully or moderately? 1.3. New or existing style? 1.4. Quickly or slowly?
2. The new idea …………………………………………………. 4
2.1. The idea 2.2. Applications ……………………………………………………. 7 2.3. Items to research
3. The role of information media ……………………………………... 8
3.1. Ideal or non-ideal market? …………………….......................... 9 3.2. Powerfully or moderately? 3.3. New or existing style? …………………………………………. 10 3.4. Quickly or slowly? 3.5. The idea ………………………………………………………... 11 3.6. Applications ……………………………………………………. 16 3.7. Items to research ……………………………………………….. 17 3.8. A farewell to EconWPA. MPRA is welcome.
Conclusions ……………………………..…………………………... 18
Acknowledgements …………………………………………………. 18
References ……………………………..…………………………... 19
1
Introduction
0.1. EconWPA – the King of public economic research media
EconWPA – the Economic Working Paper Archive of Washington University in St. Louis was one of the best and the most popular public economic research medium (see below chapter “3.2.1. People or singles?”). In a sense, EconWPA might be referred as the King of public economic research media.
0.2. The sudden announcement.
“EconWPA.wustl.edu will stop accepting paper submissions on January 1, 2006 after 150
months of operation.
…
Many thanks to all those who have supported and used EconWPA since July 1, 1993. As the
Chinese curse says, I have lived in interesting times.
Bob Parks” (EconWPA, 2005)
0.3. MPRA – a new public economic research medium
“The Munich Personal RePEc Archive (MPRA) is an initiative by economists of the RePEc network from different countries and runs under the responsibility of the Munich University Library … The Munich University Library is part of the University of Munich, a public corporation.
… This repository is intended to serve the interests of economists who want to make their work
freely available through the RePEc network but are not affiliated with any institution that provides that furtherance. The work will be made available through EconPapers, Ideas, and other services. …”
(MPRA 2006)
0.4. This paper1
This paper is, in a sense, a non-typical one. It has been written from the point of view of a research approach, which was created with the essential help of EconWPA. Due to the general character of the topic, the paper assumes a popular, simplified character and style.
1 Unfortunately, the first version of this paper was only-two-weeks-created-and-prepared (from the date of the sudden announcement of the middle of December to the 31st of December). The edited second version is in Harin (2005-2).
Fortunately, this version of paper is also only-two-weeks-created-and-prepared (from the beginning to the middle of September, to the opening of MPRA). The author will improve it and, in advance, thanks everybody for remarks and advices.
2
1. Revolution or evolution?
A few words about some evident features that can be different for evolution and revolution: A development includes both evolution and revolution. In any case, new knowledge or new
ideas modify the existing knowledge base and system of opinions. In case of evolution such modifications are smooth. In case of revolution they are sharp and even include elements of breaking. In turn, an existing knowledge base and opinion system modify new ideas.
1.1. Ideal or non-ideal market?
Ideas may constitute a market of ideas.
1.1.1. Easy or hard to enter?
The easier it is to enter new ideas, the more ideal is the market of ideas.
1.1.2. Chaos or control?
The more control there is, the less ideal is the market of ideas.
1.2. Powerfully or moderately? 1.2.1. People or singles?
The more people involved in the development, the closer it can be to a revolution.
1.2.2. Ordinary people or elite?
The less the development is confined within special parts of the whole scientific society, the
closer it can be to a revolution. The greater a relative benefit is, the greater is the interest to take part in the revolution.
1.3. New or existing style?
Every content needs proper form and proper style. New content may need new style.
1.4. Quickly or slowly?
1.4.1. Quick or slow process?
The less time is needed to publish every new paper and the more often the papers can be published, the quicker the knowledge base and system of opinions can be modified.
1.4.2. Quick or slow achievements?
The closer a development is to revolution, the more quickly a new idea modifies the knowledge base and system of opinions.
3
2. The new idea
2.1. The idea
The idea is to consider infringements of arrangements. A generalization of the idea is the economic uncertainty principle.
Definitions
The term “arrangements” generalizes contracts, arrangements, agreements, assumptions,
regulations, bargains, plans, projects, etc. The term “infringements” generalizes breaches, infringements, modifications, disturbances,
deviations, alterations, etc. The combination of these terms gives “infringements of arrangements” or “arrangements’
infringements” (hereinafter may be referred to as AI). The most obvious examples of arrangements’ infringements are a breach of a term of
contract and the well-known force majeure. Briefly, arrangements’ infringements may be called as “Anything-can-happen.”
The prevalence and inevitability of arrangements’ infringements
Examples and causes of arrangements’ infringements may be failures of power supplies,
natural disasters, people involved suddenly become ill, criminal or terrorist interventions, dishonest behavior of people involved in this arrangement, alterations of interests of parts of this arrangement etc.
Fields of expansion of arrangements’ infringements are as large as fields of expansion of, at the very least, these examples.
Probabilities of arrangements’ infringements are often small, but it is obvious that almost every arrangement may be infringed with non-zero probability.
So, arrangements’ infringements are omnipresent and inalienable property of the real world.
Is there a need for revolutionary changes?
There is a practically countless set of economic actions and there is a wealth of capitals in the world.
There is a need for proper economic theory to describe and manage them. Nevertheless, at present, there is no such theory. From the time of the halted revolution in
economics in 1950’s, a half a century of evolution did not produce it. Moreover, this evolution has come to a dead end:
A man is a key subject of economics and economic theory. But Kahneman, along with co-authors, has shown: a man may be considered irrational. In other words, the problem is, in a sense, insoluble: it is very hard to develop rational theory of an irrational subject (see below 3.5.3.2. “Contrary to the Nobel laureate?”). This contribution was marked by Prize in the Memory of Nobel in 2002.
So, a result of the evolution of economic theory is a question whether such theory can be
rational or not. Why? Possibly, because economics do not consider arrangements’ infringements. Certainly, because without AI, the world is not a real but an imaginary one.
4
Example
Consider an example, which is similar to Allais paradox. Suppose Mr. Somebody offers you a choice of just one of the following:
A guaranteed gain of $99. Or A lottery:
The gain of2 $100 with the probability 99% or $0 with the probability 1%.
The mathematical expectations of the guaranteed gain and lottery outcomes are exactly the same:
$99 × 100% = $99, $100 × 99% = $99, so, $99 = $99.
But the well-determined experimental fact is: in similar experiments the manifest majority of people chose the guaranteed gain instead of the lottery option.
Economic theory does not offer a natural and clear explanation of this fact. The possible well-known “natural and clear explanation” of gains in Allais paradox by means of risk aversion cannot give any uniform explanation for both gains and losses. The result of this explanation is gains’ risk aversion and losses’ risk seeking.
An explanation of the example
Disasters, failures, dishonesty … Really, almost every arrangement may be infringed. The point of departure of the idea’s approach is “Anything-can-happen”:
the lottery may have a defect or suffer a failure; you or Mr. Somebody may become seriously ill; Mr. Somebody’s offer may be a joke or trick; anybody (curious person, terrorist, policeman, etc.) may interfere in the process etc.
The result of the idea’s approach is: the arrangement’s infringement possibility reduces the lottery’s outcome probability.3
For example: if the AI possibility reduces the lottery outcome probability by 1% or 20%, accordingly we have:
for 1%: $99 × 100% = $99, $100 × 98% = $98, so, $99 ≥ $98. for 20%: $99 × 100% = $99, $100 × 79% = $79, so, $99 ≥ $79.
So, in actuality, the mathematical expectations of the guaranteed outcomes are more than those of the lottery outcomes.
Therefore, the choice of the majority of people corresponds exactly to the mathematical expectations.
So, the new idea can naturally and clearly explain this and similar examples. Moreover, this idea, along with economic uncertainty principle, can, at least partially, solve
risk aversion, loss aversion, overweighting of low probabilities, the Ellsberg paradox, uniform explanation of both gains and losses, the equity premium puzzle and other unsolved problems.
What may be a revolution?
Can the difference of $1 be a revolution? Hardly.
2 For accuracy of the experiment, both $99 and $100 should be in $1 banknotes. So, two parcels of 99 and 100 banknotes of $1. 3 Both absolutely and in comparison with the guarantee outcome probability. For 1%, e.g., 100%-3%=97%, 99%-4%=95%, normalizing guarantee to 100%, 95%:97%~98%. For 20%, e.g., 100%-13%=87%, 99%-30%=69%, normalizing guarantee to 100%, 69%:87%~79%.
5
Moreover, this idea in itself is not a revolutionary one.4 It is obvious and, in a sense, trivial. In technical sciences it is well-known, is widely used and successful.
But the fact is, in economics, it is still not used. This is why it can create a revolution. This idea can transform economics (that does not consider real omnipresent arrangements’
infringements) from the ideal theory of a fictitious world toward the real theory of the real world. “A revolution in economics” is to create a real economic theory. Moreover, at present, economics is, in a sense, not a science in the full meaning of the word.
It has a number of successfully working semi-empirical models. But it cannot describe the behavior of a man, its central subject. It cannot describe a number of elementary interactions between economic subjects.
The main meaning of the idea is not even arrangements’ infringements itself. The main meaning of the idea is: AI (even their possibilities) hide, mask the action of
economic laws. To consider AI is to obtain working laws, to obtain a science. “A revolution in economics” is to make economics become a science.
Why not 50 or 10 years earlier?
The essential part of the basis of economics as a science was created by von Neumann and
Morgenstern (1944). Their work and its consequences might produce the revolution in economics.
But its great promises were broken by Nobel laureate Allais (1953), Kahneman, another Nobel laureate, along with Tversky (1979) and others researchers. They have demonstrated this elegant and ideal theory cannot properly describe the reality.
The clear idea could develop and increase this revolution. Why was it not created 50 years
earlier? Why were the results of Hey and Orme (1994) not developed 10 years earlier? One of the crucial moments is not only to consider this idea in general, but to find fields
where its consideration can give essentially new results. The point is, the value of an arrangement’s infringement possibility is usually very small.
First assumption
One of the initial general assumptions of the idea’s approach was: Under the condition of the exact equilibrium of mathematical expectations, any influence of
non-zero value will be considerable. This argument gives rise to the general assumption: when comparing the risky and guaranteed choices in the same or almost the same conditions, the possibility of AI should be considered.
The next step was to achieve such an essentially new result.
The essentially new result
The first result of the approach is: When risky outcomes (whether gains or losses) have probabilities, which are almost the same
as the guarantee (100%), the arrangement’s infringement possibility can reduce real, objective probabilities of such risky outcomes in comparison with the guaranteed ones.
The result of the economic uncertainty principle (see below in 3.5.3.2.) is: when risky outcomes have probabilities, which values are about 0%, uncertainties can increase real, objective probabilities of such risky outcomes in comparison with the guaranteed ones.
4 Analogously, the ideas of freedom and equality are not a revolution. However, they have created many revolutions that have changed the whole world.
6
Available at once
These clear results can be used immediately in a wide range of fields in economics,
including, e.g., in estimating decisions of small deviations from guaranteed or well-known outcomes or ways of doing business, in predictions and planning of standard ways of doing business, in estimating low probability events etc. The examples may be small deviations from a well-known style of goods or production; interventions into slightly new segments of market, banking and investment; low-level risk situations, high-level risk situations, lotteries, insurance, etc.
Is it original?
Generally, the approach repeats and develops the results of Hey and Orme (1994). The most recent (one month before Harin 2005, the first feature paper on this idea) review in
Quiggin and Chambers (2005) and classical review in Schoemaker (1982) do not mention this idea. The author’s review of RePEc from 1969 additionally does not find this idea.
Similar or supporting ideas are primarily in Hey and Orme (1994) and secondarily, e.g., in Quiggin (2005), Novarese (2002) and Hey (2005).
It should be noted: The new idea is not “arrangements can be infringed”. It is a well-known and generally accepted fact in the economy (see, e.g., force majeure terms in contracts).
The new idea is to especially consider this fact in economics.
2.2. Applications
Arrangements are the fundamental concept of economics and widespread economic events. They are the constituent elements of the majority of items in economic theory. Infringements of arrangements have similar significance. The variety of applications’ fields of the idea’s approach can be as important and as wide as that of AI. (See analogies below in 3.6.) In particular, they can be investment, banking, insurance, business projects estimation.
2.3. Items to research
For many years now the arrangements’ infringements, though being fundamental and widespread, have lacked appropriate attention in economics.
This fact has created and accumulated plenty, even superfluity, of both ripe (and overripe) problems, which can be easily solved, and almost ripe ideas, which can be easily created with the help of AI.
(And expanses which will be opened by every solved problem and every created idea)
Fundamental theoretical problems, which can be solved
This approach can solve, e.g., old problems (including the aforementioned) of utility and prospect theories. These are ones of basic problems hindering the development of game theory and economic theory as a whole.
Research fields
These fields extend from pure mathematical (of the “Anything-can-happen” space researches) through improving and developing the economical models to methodological and experimental (of separating and measuring of various types of risk of AI).
7
3. The role of information media
Surely, a development of a science, a creation, development and dying-out of scientific
thoughts can essentially depend on means of scientific communications. This paper is devoted to only one of the many aspects of information media’s role. Because
of MPRA is in the beginning of operation, the main attention is paid to EconWPA. The considerations and conclusions about the role of information media in creation and
development of a scientific revolution may be, at least partially, useful for ideas and approaches. Generally they constitute a consequence of ideas-approaches-revolution with a revolution as a top limit point.
A scientific revolution. Creation and development
A scientific revolution can be created by a few, or even, a single paper, book. A development of a scientific revolution includes a chain reaction of multiplication of
amount of researches (and corresponding papers). This chain reaction can be created by at least three ways:
By the intensive work (and corresponding publication of papers) of a powerful group of scientists.
By a single, prominent break-through work (and corresponding paper or book publication) of (at least) a well-known scientist.
Eventually, through the course of time (if new knowledge or an idea is clear enough). In this case, an intensive chain reaction can also be created by a few, or even, a single explanatory, promoting paper of a well-known scientist.
Requirements for an idea
An idea should be a break-through: A scientific revolution needs fundamental modification of a knowledge base or a system
of opinions. Otherwise, it is not a scientific revolution (in theory) but a revolution in applications ways.
A scientific revolution needs radical new knowledge or ideas. Otherwise, a chain reaction will stop before sufficient development.
A scientific revolution needs a variety of vast fields of applications. Otherwise, a chain reaction cannot expand to a lot of researches and people.
Moreover: A scientific revolution needs a simple and clear new knowledge or idea. Otherwise, a
chain reaction will slow down due to the difficulties of understanding and learning.
Requirements for informational media
Not every break-through of a clear idea will become a revolution. A scientific revolution needs proper scientific informational media. (Without such media, a chain reaction cannot develop at all)
8
3.1. Ideal or non-ideal market?
3.1.1. Easy or hard to enter?
The overwhelming majority of journals may reject submissions. The majority of working paper series requires the membership in the corresponding scientific societies.
EconWPA neither rejected submissions nor required membership. MPRA does not require a membership. Most likely many young authors are hesitant to submit valuable new ideas. If the idea is
simple and clear, the fear of rejection increases. If an author deals with the concept of “Anything-can-happen,” the fear is additionally increased.
The first international paper on the new idea was submitted to EconWPA, and it was not by accident.
3.1.2. Chaos or control?
The overwhelming majority of journals and working paper series control submissions. EconWPA did not (though could). The only control tool was the author’s good name. It
worked successfully during its 150 months in operation.
3.2. Powerfully or moderately? 3.2.1. People or singles?
The downloading of papers from the overwhelming majority of journals and from the
majority of working paper series is to some extent restricted. Downloading from EconWPA was not. Downloading from MPRA is not. The downloading of papers from the medium can be free, but the medium’s popularity can
be low. The next table illustrates the downloading of papers from the top four series.
Top 25 Series by File Downloads 2005-11 (Source is LogEc (2005))
Series 2005 11 3 months 12 months Total
NBER Working Papers 43 145 107 842 397 417 1 234 859
EconWPA
(the total of all series)
29 791 75 510 256 287 877 138
American Economic
Review
16 127 40 312 141 143 351 348
CEPR Discussion Papers 12 789 33 706 126 231 348 923
Evidently, EconWPA’s popularity was one of the highest worldwide. MPRA’s popularity will reveal itself in the near future.
9
3.2.2. Ordinary people or elite?
Submitting a paper to the majority of working paper series requires a membership in the
corresponding scientific communities. Submitting to EconWPA did not have this requirement. Submitting to MPRA does not have this requirement as well. Moreover, MPRA has a unique feature: it submits papers on, practically, any existing
language.
Downloading papers from the overwhelming majority of journals and from the majority of working paper series requires payment or membership in notable universities or scientific societies.
Downloading from EconWPA did not. Downloading from MPRA does not.
3.3. New or existing style?
The overwhelming majority of journals (and working paper series?) may reject or delay
submissions that have a style which differs from the generally accepted one. EconWPA did not.
This paper
A general paper about a scientific revolution should be considerably popular. The reason is
because it should be addressed to a wide audience of economists, post-graduate students, scientific managers, journalists etc.
3.4. Quickly or slowly? 3.4.1. Quick or slow process?
There was no delay in publishing every paper in EconWPA. It took one day or less. It is certainly less than the time needed to perform the work and prepare the paper for
publication. So, the modification of the knowledge base and system of opinions becomes as quick as
possible. Such a medium for quick publication makes a chain reaction of researches (and
corresponding papers) possible.
3.4.2. Quick or slow achievements?
EconWPA was the best media to create and develop new ideas, approaches and scientific revolutions in economics, their optimal generator and the best means for quick achievements.
EconWPA has created the new approach. EconWPA has almost guaranteed the development of it. However, “almost” is not “guaranteed”. Due to the approach, the overwhelming majority of
arrangements can be infringed. Its own case was not an exception. Unfortunately, “Anything-can-happen” has stopped EconWPA and has limited its help to development of the approach in the beginning of this development.
10
3.5. The idea
3.5.1. A need of new ideas? Achievements. The dead end?
The next diagram represents “Achievements,” the approximate total number of publications
“matching utility or prospect in Keywords & Title” in top journals: American Economic Review, Econometrica, Harvard Business Review, Journal of Economic Literature, Journal of Finance, Journal of Financial Economics, Journal of Political Economy and Quarterly Journal of Economics.
Publications/year
0
2
4
6
8
10
12
14
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
Years
Pu
bl. o
f s
co
re=
5
3
The diagram shows an obvious decrease of “Achievements” during the years 1969 - 2005.
Trials. A need of new ideas?
On the other hand, the second diagram represents “Trials”, the approximate total number of working papers “matching utility in Keywords & Title” between the years of 1990 – 2005 (“Trials” as “Achievements” including November of 2005). This number includes electric, public and other utilities, but the error is usually not more than 15%. Before 1990, the data was probably not fully registered.
Papers/Years
0
20
40
60
80
ers
100
120
140
1980 1982 1984 1986 1988 19901992199419961998200020022004
Years
Working
Pap WP
The diagram shows an obvious increase of “Trials” in the years leading up to 2005.
The comparison of these two diagrams may be of some interest. In particular, it can be
interpreted, e.g., as a need for new ideas.
11
3.5.2. Is it fundamental?
Arrangements are the fundamental concept of the economic theory. Almost all arrangements
may suffer infringements. Therefore, arrangements’ infringements may be as fundamental for the economic theory as arrangements.
The authors and the readers of EconWPA (and MPRA?) can deal with theoretical items and questions of any depth or fundamentality.
The variety of EconWPA’s series (and MPRA) includes all items of economic theory. It is well suited for researching and discussing any fundamental problems of economic theory.
3.5.3. Is it radical? 3.5.3.1. Problems of a radical idea
The more unknown an author is, there is a greater probability of rejection for his/her paper. The more unknown the author’s institution is, the greater the probability of rejection for
his/her paper. The less influential the author’s country is, the greater the probability of rejection for his/her
paper. The more radical the idea is, the greater the probability for rejection. If the idea is contrary to generally accepted ones, the probability for rejection increases
dramatically.
3.5.3.2. Contrary to the Nobel laureate?
The stream of thinking of the new idea radically differs from the well-known generally accepted ones. Moreover, it is, in a sense, contrary to them:
Does the “ideal theory” describe the real world?
Natural and technical disasters, technical failures, health deteriorations, interventions, dishonesty, alterations of interests of parties involved in the arrangement … Really, almost every arrangement may be infringed.
But at present, economic theory is, in a sense, “ideal.” It does not consider these real possibilities. This may be one of the reasons why it cannot properly describe the real world.
Can irrational arrangements’ infringements help produce a rational theory?
The Nobel laureate Kahneman, along with Tversky (1979) has shown: a man may be
considered irrational. In other words, the problem with development of scientific economic theory is, in a sense, insoluble: it is difficult to produce a rational theory of an irrational subject.
Infringements of arrangements can be rational, not fully rational and fully irrational. In general, they may be supposed as, at least partially, irrational.
But irrational infringements of arrangements worsen or break any rational theory. Can they be useful to such rational theory? The challenge is to consider them and to add them to an ideal rational theory to obtain a real
rational theory of the real, partially irrational, world.
12
Kahneman-Tversky paradox
Let us revisit the famous experiment of Kahneman and Tversky (1979), which may be
referred to as the Kahneman-Tversky paradox: Suppose there is a little known threat and you are to choose just one of the following
outcomes: A guaranteed life-saving of 200 people. Or A possible life-saving:
of 600 people with the probability 1/3 or of no one with the probability 2/3
The (non-overwhelming but evident) majority of people choose the guarantee. Let us reformulate the same conditions to: Suppose there is an insufficiently known threat and you are to choose just one of the
following outcomes: A guaranteed death of 400 people. Or A possible death:
of 600 people with the probability 2/3 or of no one with the probability 1/3
For the exactly the same (only reformulated) situation the (non-overwhelming but evident) majority of people choose the possibility.
In this brilliant paradox, people appear to be quite irrational.
Kahneman-Tversky paradox explanation
The Kahneman-Tversky paradox, along with other experiments, can be explained by considering the psychological aspects of a man. Undoubtedly, the psychological aspects of a man should be considered. But what about pure mathematics? Is it fully helpless?
Let us count: A guaranteed life-saving of 200 people. Or A possible life-saving:
of 600 people with the probability 1/3 or of no one with the probability 2/3
From the point of view of pure mathematics: 200 × 100% = 200, 600 × 33,33% = 200, so, 200 = 200.
A guaranteed death of 400 people. Or A possible death:
of 600 people with the probability 2/3 or of no one with the probability 1/3
From the point of view of pure mathematics: -400 × 100% = -400, -600 × 66,66% = -400, so, -400 = -400.
So, the ideal equalities: life-saving 200 × 100% = 200, 600 × 33,33% = 200, so, 200 = 200.
death -400 × 100% = -400, -600 × 66,66% = -400, so, -400 = -400.
But “Anything-can-happen”: the probability of the risky outcome can be really lower than 2/3 (And every 1/600 ~ 0.17% is an anyone’s life). For example: if the arrangement’s infringement possibility reduces the lottery outcome probability by 1.7% (about 10 lives) we have real inequalities: life-saving 200 × 100% = 200, 600 × 31,63% = 190, so, 200 ≥ 190.
death -400 × 100% = -400, -600 × 65,96% = -390, so, -400 ≤ -390.
Therefore, the choice of the majority of people corresponds exactly to the mathematical
13
expectations.
So, the new idea can naturally and clearly explain this paradox as well. It is surprising that the formal application of the arrangements’ infringements possibility
approach gives the same paradoxical choices as those the people choose. This is a question for a further research. The possible aspect of this question is the formulation of the experiment implies the separate evaluation of gains and losses.
The complication of Allais paradox
Analogously (though not so elegant), we may complicate the paradox (of 2.1. The idea), which is similar to Allais paradox, and may compare two experiments5:
1) Suppose Mr. Somebody offers you a choice of just one of the following: A guaranteed gain of $99. Or A lottery:
The gain of $100 with the probability 99% or $0 with the probability 1%.
The mathematical expectations of the guarantee and the lottery outcomes are exactly the same: But in similar experiments the obvious majority of people chose the guaranteed gain instead of the lottery option.
2) Suppose Mr. Somebody offers you a choice of just one of the following: A guaranteed loss of $99. Or A lottery:
The loss of $100 with the probability 99% or $0 with the probability 1%.
The mathematical expectations of the guarantee and the lottery outcomes are exactly the same: But in similar experiments the obvious majority of people chose the lottery loss instead of the guaranteed one.
From the point of view of pure mathematics, there are the ideal equalities: for gains $99 × 100% = $99, $100 × 99% = $99, so, $99 = $99.
for losses -$99 × 100% = -$99, -$100 × 99% = -$99, so, -$99 = -$99.
But “Anything-can-happen”: the lottery may have a defect or suffer a failure; suddenly, you or Mr. Somebody may become ill; Mr. Somebody’s offer may be a joke or trick; anybody (curious person, terrorist, policeman, etc.) may interfere in the process, etc. And the arrangement’s infringement possibility reduces the lottery outcome probability6.
For example: if the arrangement’s infringement possibility reduces the lottery outcome probability by 1% or 20% we have correspondingly real inequalities:
for 1%: for gains: $99 × 100% = $99, $100 × 98% = $98, so, $99 ≥ $98. for losses: -$99 × 100% = -$99, -$100 × 98% = -$98, so, -$99 ≤ -$98.
for 20%: for gains: $99 × 100% = $99, $100 × 79% = $79, so, $99 ≥ $79. for losses: -$99 × 100% = -$99, -$100 × 79% = -$79, so, -$99 ≤ -$79.
5 For the experiment accuracy, both $99 and $100 should be in $1 banknotes. So 99 and 100 banknotes of $1. 6 Both absolutely and in comparison with the guarantee outcome probability. For 1%, e.g., 100%-3%=97%, 99%-4%=95%, normalizing guarantee to 100%, 95%:97%~98%. For 20%, e.g., 100%-13%=87%, 99%-30%=69%, normalizing guarantee to 100%, 69%:87%~79%.
14
So, actually:
the mathematical expectations of the guarantee gains outcomes are more than those of the lottery ones.
the mathematical expectations of the lottery losses outcomes are more than those of the guaranteed ones.
Therefore, the choice of the majority of people corresponds exactly to the mathematical
expectations. Therefore, the new idea can also naturally and clearly explain this and similar examples.
Contrary to the Nobel laureate?
The idea is not to eliminate or to ignore the doubtlessly important psychological aspects of a man and the problem whether a man is rational or not in choosing between outcomes.
The idea is, in particular, the correct determination of the probabilities of these outcomes. The idea is to efficiently use pure mathematics and rational reasoning, not after, but
preceding, the consideration of psychological and irrational aspects.
Coinciding time. Coinciding opinions.
The most recent paper of Kahneman and Thaler (2005) and the first version of this paper (the second see Harin 2005-2) coincide in time within the limits of a month: 1 and 31 December accordingly. They almost coincide in opinions too. Indeed, in the paper of Kahneman and Thaler:
1) “A long series of modern challenges to utility theory, starting with the paradoxes of Allais (1953) and Ellsberg (1961) and including framing effects, have demonstrated inconsistency in preferences.”
So, the masters of economics agree that the paradox of Allais is not rationally solved by evolutionary economics (instead of 50 years of numerous attempts to solve it).
2) Nevertheless, the paradoxes of Allais and Kahneman-Tversky, risk aversion, the equity premium puzzle and other problems, which may be explained by the idea of AI, are not included in their examples of utility concerning anomalies.
3) Their paper offers four main examples of anomalies: “effects of the current emotional state, effects of the context of choice, learning from the past and mispredicting adaptation”.
The idea of AI and all of these examples do not contradict each other.
15
Economic uncertainty principle
The economic uncertainty principle has been proposed in Harin (2006). It is essentially the
same as the idea of arrangements’ infringements. Actually, the economic uncertainty principle is the generalization of the idea of arrangements’ infringements. Arrangements’ infringements are, in a sense, more particular and exact approach.
The economic uncertainty principle states: Future events contain a degree of (hidden) uncertainty. The probability of every future event contains a degree of (hidden) uncertainty.
The first application of the economic uncertainty principle gives: Phigh real < Phigh preliminary determined
Plow real > Plow preliminary determined
where high - refers to probabilities, which values are about 100% low - refers to probabilities, which values are about 0%
3.5.4. Is it clear?
Arrangements are usual and intuitively clear phenomena. Infringements of arrangements are common, generally accepted (e.g. force majeure terms in
contracts), and intuitively clear phenomena also. It is clear that the overwhelming majority of arrangements may be infringed. It is clear that arrangements’ infringements are to be considered. A clear idea can be represented in concise words. Such representations can (and often
should) be expressed in a non-scholarly style. EconWPA was the medium which admitted papers of a simple and clear style corresponding
to the style of the idea.
3.6. Applications
The idea can be evidently applied in economic theory. The idea (and results of its applications from economic theory) can be evidently applied in
practical economy. The variety of EconWPA series includes all items of economic theory. MPRA includes all items of economic theory as well. The themes of EconWPA (and MPRA?) are sufficiently close to the economy to be
applicable in economic practice. However, there are journals, which tend to be more practical. But the variety of EconWPA series is well structured. It makes it easy to navigate for the economists who are application-oriented and have no experience in dealing with scholarly journals.
MPRA is well suited to browse by year, JEL, author and title.
16
“Friction.” “Dissipation.” “Noises.” “Brownian motion.”
“Galilean and Newton laws.”
Arrangements’ infringements have rich analogs in other sciences: Arrangements’ infringements can be, in a sense, referred to as a “friction,” “dissipation,”
“noise,” “Brownian motion,” etc in economics (Problems of noise, noise traders, etc are already discussed in economics. See, e.g., Capuano 2006, Chay et al 2005 and Hey 2005).
These analogs are of obvious original importance. Moreover, often, friction, dissipation and noises hide or mask the action of an important law
or laws. The example can be Galilean insight about uniform motion. Such motion could not be observed in practice during Galilean times. It is hidden by friction.
Arrangements’ infringements (even their possibilities) can hide the action of economic laws. The accurate accounting of arrangements’ infringements and their possibility (and
uncertainty) can clear this action and these laws. So, arrangements’ infringements can be, to some extent, as fundamental, important and
widespread in economics as their analogs in other sciences. So, arrangements’ infringements can be, to some extent, as fundamental, important and
widespread in economics as economic laws, whose actions they hide. The variety of EconWPA series includes all the fields of economics and is capable of
representing all the mentioned analogs. MPRA includes all the fields of economics and is capable of representing all the mentioned
analogs also.
“EU plus noise”
The following moments should be noted: The approach renews, generalizes and develops the results of Hey and Orme (1994). Their
article was devoted to expected utility (EU). The final statement of the article was: “... we are tempted to conclude by saying that our study indicates that behavior can be
reasonably well modeled (to what might be termed a “reasonable approximation”) as “EU plus noise”. Perhaps we should now spend some time thinking about the noise, rather than about even more alternatives to EU?”
Unfortunately, their work was not developed to obtain particular results. Even its general value for EU and for the whole economic theory was not recognized by the economic scientific society.
The idea of arrangements’ infringements was created accidentally. The considered article was surely the result of purposeful work. Moreover, the general idea of a possible influence of factors, such as noise, was a top of an iceberg of 40-years of collective efforts of the best scholars of the world. So, it is not trivial, as it may seem from the very simplified reasoning of this popular paper.
17
3.7. Items to research
The variety of EconWPA’s series (and MPRA) includes all topics of economics and is well
structured. It was a medium that is one of the best to widespread of the chain reaction of researches.
Advantage and risk to start quickly to be the first
As a chaotic complex phenomenon, a revolution is unpredictable. So, in a revolution, the larger the research field is, the greater the risk of a mistake of the
prediction is. The more localized the research field is, the less the risk can be and the more the advantage of starting quickly and of being the first is. If the research field is rather small, there is no sense of being the second and the success of the first in such field is much more feasible.
This circumstance can cause a wealth of unknown and known authors to be successfully involved in a scientific revolution with their works regarding particular questions. This wealth of authors is connected with the high numbers of publications.
Some media have limited capacity of publications per month. EconWPA did not. MPRA does not (probably).
3.7.4. To observe and describe
Nep-upt report
The nep-upt report (New economic papers – utility models and prospect theories report) was created. It has three objectives.
1) To inform the scientific society about the development of the renewed research field of utility models and prospect theories.
2) To not miss the beginning of the part of the chain reaction in this particular field of papers concerned with the idea.
3) To observe and describe the development of a chain reaction in this particular field.
EconWPA
So, EconWPA is, in any case, the best public medium to develop and spread new, revolutionizing ideas, knowledge and opinions, to create and develop new ideas, approaches and scientific revolutions, and to observe their creation and development.
Unfortunately, “Anything-can-happen.” And the aforementioned stop has happened.
MPRA
MPRA may, at least partially, substitute EconWPA in creation and development of ideas, approaches and scientific revolutions, and to observe their creation and development.
3.8. A farewell to EconWPA. MPRA is welcome.
Farewell to EconWPA. Farewell to the generator of new ideas, approaches and scientific revolutions. Farewell to one of the best public research media. MPRA is welcome.
18
Conclusions
The new idea and approach are presented. The idea is to consider arrangements’
infringements (AI). The approach repeats and develops the results of Hey and Orme (1994). The approach is based on this idea and on the economic uncertainty principle. The economic uncertainty principle states (Harin 2006):
Future events contain a degree of (hidden) uncertainty. The probability of every future event contains a degree of (hidden) uncertainty.
Mathematically: Preal ~ Ppreliminary determined ± ∆P Pmean real=Ppreliminary determined + δP where and below
Preal - real (future) probability; Ppreliminary determined - the preliminarily determined value of P; ∆P - the uncertainty of the real (future) probability; δP - the shift of the real mean value of P in the comparison with the
preliminarily determined value of P (δP may be as positive or negative).
Arrangements’ infringements and uncertainty are widespread, omnipresent economic events and feature. Without AI and uncertainty, the world is not real. Without proper consideration of AI and uncertainty, economics is not real too. AI and uncertainty can hide, mask the action of economic laws.
The approach can assist to develop more realistic economic theory and to improve its scientific accuracy.
The first results of the approach are already available both for scholars and for practical economists. In a simplified form, they are: Phigh real < P high preliminary determined
Plow real > Plow preliminary determined
They hold both for gains and losses. These results can, at least partially, solve the Allais paradox, risk aversion, loss aversion,
overweighting of low probabilities, the Ellsberg paradox, uniform explanation of both gains and losses, the equity premium puzzle and other unsolved problems.
These results can be used in a number of fields in economics, including, e.g., in estimating decisions of small deviations from guaranteed or well-known outcomes or ways of doing business, in predictions and planning of standard ways of doing business, in estimating low probability events, etc. The examples may be small deviations from a well-known style of goods or production, interventions into slightly new segments of market, banking and investment, low-level risk situations, high-level risk situations, lotteries, insurance problems, etc.
The general character of the topic has caused the popular character and style of this paper.
EconWPA was the best public economic research medium to create and develop new ideas, approaches and scientific revolutions in economics.
There is a need for the renewal of EconWPA or for new public research media such as EconWPA.
MPRA is a new promising public economic research medium, which may, at least partially, substitute EconWPA.
Acknowledgements
Thanks to EconWPA. Thanks to Bob Parks and to all those who have supported EconWPA. Thanks to founders and initiators of MPRA.
19
References
Allais, M. (1953) “Le comportement de l'home rationnel devant le risque: critique des postulats
et axiomes de l'école Américaine” Econometrica, 21, 503-46. Blankmeyer, E. (1999) “The Heisenberg Principle in Economics” General Economics and
Teaching from EconWPA, 9904004. Capuano, C. (2006) “Strategic noise traders and liquidity pressure with a physically deliverable
futures contract” International Review of Economics & Finance, 2006, 15, # 1, 1-14. Chay, K., McEwan, P. and Urquiola M. (2005) “The Central Role of Noise in Evaluating
Interventions that Use Test Scores to Rank Schools” American Economic Review, 2005, 95, # 4, 1237-1258.
EconWPA (2005) An Electronic Working Paper Archive in Economics http://econwpa.wustl.edu/wpasubmit.html
Ellsberg, D. (1961) “Risk, Ambiguity and the Savage Axioms” Quarterly Journal of Economics, 75, 643-669.
Goetzmann, W. and Ibbotson, R. (2005) “History and the Equity Risk Premium” Yale School of Management Working Papers from Yale School of Management, Yale ICF Working Paper No. 05-04.
Harin, A. (2006) “Economic Uncertainty Principle?” Pre- and Post-Print documents from HAL, CCSd/CNRS, halshs-00090791_v1.
Harin, A. (2005-2) “Scientific Revolution? A Farewell to EconWPA” Method and Hist of Econ Thought from Economics Working Paper Archive at WUSTL, 0512003.
Harin, A. (2005) “A new approach to solve old problems” Game Theory and Information from Economics Working Paper Archive at WUSTL, 0505005.
Harin, A. (2004) “Arrangement infringement possibility approach: some economic features of large-scale events” Research Announcements, Economics Bulletin, November 15, 2004 at http://www.economicsbulletin.uiuc.edu/DisplayList.asp?Type=All&Code=2#more
Hey, J. (2005) “Why We Should Not Be Silent About Noise” Experimental Economics, 2005, 8, 325-345.
Hey, J. and Orme, C. (1994) “Investigating Generalizations of Expected Utility Theory Using Experimental Data” Econometrica, 62, 1291-1326.
Kahneman, D. and Thaler, R. (2005) “Anomalies: Utility Maximization and Experienced Utility” SSRN Working Paper Series 2005.
Kahneman, D. and Tversky, A. (1979) “Prospect theory: An analysis of decision under risk,” Econometrica, 47, 263–291.
LogEc (2005) Top 25 Series by File Downloads 2005-11 http://logec.repec.org/scripts/seriesstat.pl?topnum=25;bymin=10;sortby=ld
MPRA (2006) http://mpra.ub.uni-muenchen.de/ Novarese, M. (2002) “Toward a Cognitive Experimental Economics” Experimental from
Economics Working Paper Archive at WUSTL, 0211002. Quiggin, J. (2005) “The precautionary principle in environmental policy and the theory of choice
under uncertainty” Risk and Sustainable Management Group, University, Murray Darling Program Working Paper: M05#3.
Quiggin, J. and Chambers, R. (2005) “Economists and uncertainty” No WP2R05, Risk & Uncertainty Working Papers from Risk and Sustainable Management Group, University of Queensland.
Schoemaker, P. (1982) “The Expected Utility Model: Its Variants, Purposes, Evidence and Limitations” Journal of Economic Literature, XX, 529–563.
Von Neumann, J. and Morgenstern, O. (1944) Theory of Games and Economic Behavior, Princeton, N.J., Princeton University Press.
20
